Release the Condor!

A long time ago in a galaxy far, far away, there was an advertising company trying to come up with a video commercial to introduce Buick’s new car. After a number of the ad company’s proposals were turned down, they came up with the idea of the car cruising on a road down the side of a mountain with an eagle superimposed flying over it. Buick loved it! There was, however, one problem; you cannot capture, or tame, an eagle. Therefore it was decided to use a condor. Hereto there was a problem, the ad agency could only find one captive condor in the world; and, it was at a zoo in Lima, Peru. After arrangements were made, the camera crew showed up on a cliff in the Andes Mountains to film the commercial. With all cameras rolling the call was given to “release the condor.” But instead of soaring into the sky, the condor plummeted hundreds of feet to its death because after years of captivity it had forgotten how to fly. Subsequently, anytime something bad was about to happen, or something bad had just happened, advertising companies shouted “release the condor!”

I recalled this true story as I was reading an excellent article written by Mitch Tuchman for MarketWatch with the title, “Why long-term investors should listen to Jamie Dimon on China, Greece.” The author went on to write:

J.P. Morgan CEO James Dimon, a man known for tough-talking swagger and massive Wall Street deals, recently told reporters anxious for news exactly what they didn't expect to hear: Everything is fine, so stop freaking out. Indebted Greece is on the ropes and might leave the euro, it's true. China's main stock market index recently went into free fall. They didn't mention the latest atrocity by ISIS or wild new predictions of a "mini ice age" by 2030, but Dimon's response would have been the same. Why worry about these things? They won't really change the investing world much. "You have to separate the financial markets from the economy," Dimon said when quizzed about China. "You can't expect any economy to have perpetual growth at 10%." Does Dimon know something we don't know? Yes ... and no. More accurately, he has come to accept a basic fact about stock markets and the news cycle that all long-term investors should recognize – that there is no real link between specific "disastrous" events and the performance of the stock market.

This concept espoused by Jamie Dimon is what we attempted to convey in last month’s Gleanings report titled “Feel the Fear ... and Do it Anyway.” As expressed repeatedly in these missives, “The equity markets do not care about the absolutes of ‘good’ or ‘bad’ but only if things are getting better or worse, and things are getting better!” Yet, it is human nature to worry about the “good” and “bad” things that constantly bombard investors. However, as a successful investor, “[You need] to accept a basic fact about stock markets and the news cycle that all long-term investors should recognize – that there is no real link between specific ‘disastrous’ events and the performance of the stock market.”

Shortly after reading that MarketWatch article I received Murray Stahl’s always insightful quarterly market commentary. I met Murray a few years ago after reading his book “How They Did It: Exceptional Stories of Great Investors.” Murray is the chief investment officer at the New York-based money management firm Horizon Kinetics and is truly a value-centric, out of the box thinker, who has penned such reports as The Spin-Off Research Compendium,The ETF Compendium, etc. Many of his insights can be gleaned at the invaluable website by clicking “Research Library.” In this quarter’s report Murray writes:

In last quarter’s review, we threatened to return to the inflammatory statement that many standard macroeconomic factors that are considered necessary elements of the portfolio management process and security valuation models, such as the expectations for GDP growth or interest rates or oil prices, and so forth, are more the source of bad decision making than good, and probably detract from performance more than they help. That approach is rooted in an unintended departure from the scientific method, the notion that one can bring a systematic, formulaic approach to perhaps the ultimate non-absolute, interactive environment: namely a market-place composed of ever-reacting and anticipating participants called human beings—the stock market.

Wow, if that sounds familiar it should because it sounds a lot like me. Clearly I like “out of the box” thinking and while Horizon Kinetics has many funds on the Raymond James platform, the fund I really am intrigued with is the “owner/operators” fund, namely the Virtus Wealth Masters A Fund (VWMAX/$15.22). The fund mainly invests in companies where the company’s management team owns a substantial amount of shares. Over the long term, such owner/operator companies’ stock tends to do pretty well, for obvious reasons.

Speaking of “out of the box” thinkers, I am hosting a conference call with another friend of mine, Troy Shaver, President and lead portfolio manager of Dividend Assets Capital. His investment model is to screen down to about 130 companies that have increased their dividends by 10% or more per year for at least 10 years. He then turns that list over to his fundamental analysts to research which ones are the best investments. A number of years ago Troy was “tapped” to be the outside manager of the Goldman Sachs Rising Dividend Funds (GSRAX/$21.59), which I own; and, whose investment model is the same as Troy’s. Those that have listened to Troy’s previous conference calls know that he not only discusses themes and sectors, but gives stock-specific recommendations. The “call” will begin at 4:15 p.m. today and the dial in number is 888.500.6948 with the passcode 5528510.

As for the stock market, last week the NASDAQ broke out to new all-time highs largely driven by the internet stocks. Unfortunately, the S&P 500 (SPX/2126.64) and Russell 2000 did not. Moreover, Friday’s action in the S&P MidCap 400 (MDY/274.20) and Russell 2000 (RUT/1267.09) may be pointing the way lower. Recall, two weeks ago the models were calling for a trading bottom in the SPX at the 2040 – 2050 level. Last week those same models suggested a top would occur with either no new high in the SPX, or a marginal new high. They are still suggesting that. The Volatility Index (VIX/11.95) also implies a trading top is due given its recent collapse to under 13, which in the past has signaled trading tops. Further, the McClellan Oscillator, and all of the macro sectors, are overbought, with the exception being Energy and Materials; and, the U.S. Dollar Index, while not back to the March/April double top highs, has been strong recently, bringing back concerns about multinational companies’ earnings. This is not an unimportant point. I, however, continue to think the dollar topped in the spring, at least on a trading basis, and that earnings are going to be just fine. Not too long ago 2Q15 earnings reports were expected to be down more than 5%. Now that expectation is for down 3%, but judging by the current earnings “beat rate,” 2Q earnings are on track to end up by 3%. That could make 2015’s earnings numbers for the SPX to be $121, which is what we wrote about back in April when we said analysts have cut earnings estimates by too much based on the weakness in the energy and financials complexes. If that proves correct the SPX is trading at 17.6x 2015’s earnings estimates, and if next year’s S&P earnings estimate of $132.06 proves correct, the P/E multiple is 16.1x. Obviously, we continue to believe the equity markets are in a secular bull market that has years left to run, even though our models are suggesting a very modest pullback over the next few weeks. If correct, that pullback is for buying.

The call for this week: Today’s conference call with Troy Shaver is a must! Also on the “must” list is for the SPX to break to new highs and extend higher. Regrettably, I do not think that is going to happen. Look for early week strength in the SPX that gives way to late week weakness. This morning the futures are marginally higher on Greek banks reopening, a new era with Cuba, a three-month high on the U.S. dollar, Europe backing the Iran deal, and commodities cracking. Indeed, “release the condor!”

© Raymond James

© Raymond James

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